I

103D CONGRESS

1ST SESSION H. R. 574

To amend the Securities Exchange Act of 1934 to impose additional fraud

detection and disclosure obligations on auditors of public companies.

IN THE HOUSE OF REPRESENTATIVES

JANUARY 26, 1993

Mr. WYDEN (for himself, Mr. MARKEY, and Mr. DINGELL) introduced the

following bill; which was referred to the Committee on Energy and Commerce

A BILL

To amend the Securities Exchange Act of 1934 to impose

additional fraud detection and disclosure obligations on

auditors of public companies.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,

3 SECTION 1. SHORT TITLE.

4 This Act may be cited as the ‘‘Financial Fraud De5 tection and Disclosure Act’’.

6 SEC. 2. AMENDMENT TO SECURITIES EXCHANGE ACT OF

7 1934.

8 (a) AMENDMENTS TO THE SECURITIES EXCHANGE

9 ACT OF 1934.—The Securities Exchange Act of 1934 is
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1 amended by inserting after section 10 (15 U.S.C. 78j) the

2 following new section:

3 ‘‘FRAUD DETECTION AND DISCLOSURE

4 ‘‘SEC. 10A. (a) AUDIT REQUIREMENTS.—Each audit

5 required pursuant to this title of an issuer’s financial

6 statements by an independent public accountant shall in7 clude, in accordance with methods prescribed by the Com8 mission, the following:

9 ‘‘(1) procedures designed to provide reasonable

10 assurance of detecting illegal acts that would have a

11 direct and material effect on the determination of fi12 nancial statement amounts;

13 ‘‘(2) procedures designed to identify related

14 party transactions which are material to the finan15 cial statements or otherwise require disclosure there16 in; and

17 ‘‘(3) an evaluation of whether there is substan18 tial doubt about the issuer’s ability to continue as a

19 going concern over the ensuing fiscal year.

20 ‘‘(b) REQUIRED RESPONSE TO AUDIT DISCOV21 ERIES.—

22 ‘‘(1) INVESTIGATION AND REPORT TO MANAGE23 MENT.—If, in the course of conducting any audit

24 pursuant to this title to which subsection (a) applies,

25 the independent public accountant detects or other26 wise becomes aware of information indicating that
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1 an illegal act (whether or not perceived to have a

2 material effect on the issuer’s financial statements)

3 has or may have occurred, the accountant shall, in

4 accordance with methods prescribed by the Commis5 sion—

6 ‘‘(A)(i) determine whether it is likely that

7 an illegal act has occurred, and (ii) if so, deter8 mine and consider the possible effect of the ille9 gal act on the financial statements of the is10 suer, including any contingent monetary effects,

11 such as fines, penalties, and damages; and

12 ‘‘(B) as soon as practicable inform the ap13 propriate level of the issuer’s management and

14 assure that the issuer’s audit committee, or the

15 issuer’s board of directors in the absence of

16 such a committee, is adequately informed with

17 respect to illegal acts that have been detected or

18 otherwise come to the attention of such ac19 countant in the course of the audit, unless the

20 illegal act is clearly inconsequential.

21 ‘‘(2) RESPONSE TO FAILURE TO TAKE REME22 DIAL ACTION.—If, having first assured itself that

23 the audit committee of the board of directors of the

24 issuer or the board (in the absence of an audit com25 mittee) is adequately informed with respect to illegal
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1 acts that have been detected or otherwise come to

2 the accountant’s attention in the course of such ac3 countant’s audit, the independent public accountant

4 concludes that—

5 ‘‘(A) any such illegal act has a material ef6 fect on the financial statements of the issuer,

7 ‘‘(B) senior management has not taken,

8 and the board of directors has not caused sen9 ior management to take, timely and appropriate

10 remedial actions with respect to such illegal act,

11 and

12 ‘‘(C) the failure to take remedial action is

13 reasonably expected to warrant departure from

14 a standard auditor’s report, when made, or

15 warrant resignation from the audit engagement,

16 the independent public accountant shall, as soon as

17 practicable, directly report its conclusions to the

18 board of directors.

19 ‘‘(3) NOTICE TO COMMISSION; RESPONSE TO

20 FAILURE TO NOTIFY.—An issuer whose board of di21 rectors has received a report pursuant to paragraph

22 (2) shall inform the Commission by notice within

23 one business day of receipt of such report and shall

24 furnish the independent public accountant making

25 such report with a copy of the notice furnished the
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1 Commission. If the independent public accountant

2 making such report shall fail to receive a copy of

3 such notice within the required one-business-day pe4 riod, the independent public accountant shall—

5 ‘‘(A) resign from the engagement; or

6 ‘‘(B) furnish to the Commission a copy of

7 its report (or the documentation of any oral re8 port given) within the next business day follow9 ing such failure to receive notice.

10 ‘‘(4) REPORT AFTER RESIGNATION.—An inde11 pendent public accountant electing resignation shall,

12 within the one business day following a failure by an

13 issuer to notify the Commission under paragraph

14 (3), furnish to the Commission a copy of the ac15 countant’s report (or the documentation of any oral

16 report given).

17 ‘‘(c) AUDITOR LIABILITY LIMITATION.—No inde18 pendent public accountant shall be liable in a private ac19 tion for any finding, conclusion, or statement expressed

20 in a report made pursuant to paragraph (3) or (4) of sub21 section (b), including any rules promulgated pursuant

22 thereto.

23 ‘‘(d) CIVIL PENALTIES IN CEASE-AND-DESIST PRO24 CEEDINGS.—If the Commission finds, after notice and op25 portunity for hearing in a proceeding instituted pursuant
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1 to section 21C of this title, that an independent public

2 accountant has willfully violated paragraph (3) or (4) of

3 subsection (b) of this section, then the Commission may,

4 in addition to entering an order under section 21C, impose

5 a civil penalty against the independent public accountant

6 and any other person that the Commission finds was a

7 cause of such violation. The determination whether to im8 pose a civil penalty, and the amount of any such penalty,

9 shall be governed by the standards set forth in section 21B

10 of this title.

11 ‘‘(e) PRESERVATION OF EXISTING AUTHORITY.—Ex12 cept for subsection (d), nothing in this section limits or

13 otherwise affects the authority of the Commission under

14 this title.

15 ‘‘(f) DEFINITIONS.—As used in this section, the term

16 ‘illegal act’ means any action or omission to act that vio17 lates any law, or any rule or regulation having the force

18 of law.’’.

19 (b) EFFECTIVE DATES.—As to any registrant that

20 is required to file selected quarterly financial data pursu21 ant to item 302(a) of Regulation S–K (17 CFR

22 229.302(a)) of the Securities and Exchange Commission,

23 the amendments made by subsection (a) of this section

24 shall apply to any annual report for any period beginning

25 on or after January 1, 1994. As to any other registrant,
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1 such amendment shall apply for any period beginning on

2 or after January 1, 1995.

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